In the midst of an interview, Don Gray indulges in one of his favourite pastimes – pumping the virtues of his public company, Peyto Exploration & Development, at the expense of his rivals.

The ostentatious chief executive officer furiously begins tapping on his computer keyboard to access a research report.

The data boasts his company’s superiority compared to other companies in the oilpatch, including a major player, Canadian Natural Resources, which he delights in singling out.

In the close-knit Calgary oilpatch, CEOs generally shy away from making industry comparisons that stack their companies against rivals.

But Gray, a 37-year-old native of Oxbow, Sask., loves nothing better than to flaunt Peyto’s spectacular track record against all comers. Peyto’s website is a gusher of numerous charts and numbers that place the company at the head of the class.

Larry MacDougal photo, Business Edge
Peyto CEO Don Gray is fond of using charts to make comparisons with rivals.

Although Gray’s bravado is met with raised eyebrows in the ’patch, longtime Peyto shareholders are singing the praises of the four- year-old company named for famous Canadian pioneer and Banff Park trailbreaker Wild Bill Peyto.

Of course, one of those shareholders is Don Gray, whose initial 10-cent shares – he had 600,000 at the launch – have appreciated 15,730 per cent. He now owns 1.7 million shares at $15.73.

Now, Gray faces a new challenge as Peyto prepares to take on a new lease on life as an income trust. His detractors, no doubt, will be buried in a mountain of charts.

1. When you launched Peyto in 1998, did you envision that the company could reach a market cap of $677 million?

“I could envision that, but I’m not the type to look at the peak when climbing a mountain. I look at the next step forward. As much as I could envision that, I wasn’t focused on that. I focused on drilling the next good well and making the next good deal. Sometimes, it can be overwhelming if you look too far in front of yourself. In life, we don’t sit back and quantify how many steps we take each day or how many things we do. When we look at the magnitude of what we’ve done, it seems overwhelming but, when you break it down into small pieces, it’s not that difficult at all.”

2. What’s been the foundation of your success with Peyto?

“We were fortunate not to have the support of the insiders of Calgary (investors). Because of that, we were forced to go out and focus on things that we understood, which was true value as opposed to focusing on the marketplace and trying to find arbitrage between what the market would pay you for your shares and what you could pay for assets. That game plan has a very short life to it because you’re ultimately always diluting yourself downward. It’s kind of like what (investing legend) Warren Buffett says. I think he said: ‘If you want a company of giants, hire people who are bigger than you, and if you want a company of dwarfs, hire people who are littler than you.’ Our attitude was always to take your dollar and invest it into an opportunity that was going to make it worth more than a dollar. The typical oil-and-gas mentality here in Calgary is to take a dollar of somebody else’s, get in for free because you’re the insider and see if you can backfill. You take that dollar into the market and maybe find something that’s worth half a dollar. But you’re not using real dollars.”

3. What was your strategy in raising capital to get Peyto off the ground?

“We talked to brokerage houses and people who have been successful in this industry and they had no interest in investing in our company. The bottom line was that the models that they invest in are different from the ones we invest in. They’re accustomed to getting in on the front end, getting in at a low price and then getting the next person in at a higher price. When we issued shares from Day 1, we were issuing shares at the same price to business associates or friends (in private placements) as we got in at. It wasn’t a situation where we were going to get paid just for issuing shares. The idea was that they (investors) became our partners straight up and we got paid a salary. We got options. So, if we made money for those shareholders, then we were going to make money for ourselves on top of our salaries, as opposed to making money up front without doing anything.”

4. To what do you attribute the steady rise in Peyto’s shares from 10 cents to $15.50 without any major corrections along the way?

“It’s a case of taking simple steps forward. It’s not erratic. Because we didn’t have a track record, we showed people what the play was from Day 1. But most of the financial people don’t have an ability to discriminate between one play or another. Their ability is to understand whether they can hype the story or not. So, if you’re somebody who has run a company before, they know they can hype that. They don’t know how to hype a technical play. Our stock performance has tracked our production growth on a per-share basis and that is very unusual.”

5. Has Peyto gotten a fair shake from the Street, in your opinion?

“For sure, we haven’t. We don’t even get credit for the track record we have. You know, people have a problem with us even hyping that up – hyping up what we’ve actually done. We’ve never traded at the very high multiples that other companies have. Yet, today, you see companies that have just terrible performance, performance that just can’t get worse, and yet they’re trading at extreme valuations. You wonder how you can do so badly and yet trade at such a high valuation. There are plenty of examples out there. There’s a train wreck around the corner every year in Calgary.”

6. What’s your view of the way many equity analysts do their jobs?

“What the analysts like to have is a constant flow of product so they create parameters to define what success is. Anybody who has gone to business school or looks at a business or understands how to invest money will tell you those parameters are meaningless as to whether a company is a success or not. But they use those things in order to try to say, ‘This is what you should buy.’ It’s kind of like when I was in engineering school and they would give you a word problem and give you a whole bunch of smoke just to try and get you to take your eye off the ball. That’s exactly what’s going on here. It’s unfortunate for the average investor out there.”

7. How would you describe your management style?

“I think I exercise very good leadership on a global basis. I’m not a detail person. I’m detailed in terms of focusing on an area and understanding a project. But once we understand what we’re going to do, then we can move forward and we don’t spend a lot of time trying to over-science it.”

8. What kind of rapport do you strive for with employees?

“I like to have people working with me who are given full responsibility for their job and I don’t want to be looking over their shoulder. So, I’m not the type of CEO who has to make all the decisions whatsoever. I’ve got my role and they’ve got their role. So, I think I delegate quite well. I also want to make sure that if I’m doing well as the CEO financially, because the company’s doing well, then that (wealth) is spread throughout the company. I don’t want to have wide gaps in terms of having just a select few doing well (financially) and others not doing so well.”

9. How important is it for you to reward employees for performance?

“It’s very important. I put a very, very high value on those people, so I think they’re probably rewarded better at Peyto than any other company in town. I’ve worked for people who had no clue how to exploit my skills or those of people around me. So, I take a lot of pride in making sure that I can exploit the people that work here to their maximum. Therefore, we can pay people more than other people could possibly pay them because we get more out of them. I look at people as a true asset.”

10. What was it like working for oilpatch legend J.C. Anderson at Anderson Exploration?

“He’s a very, very smart guy. He’s probably the smartest person I’ve worked for. He had a very strong technical background and he applied that to providing himself with a vision into the future. There are a lot of guys who use their technical background just to stifle any growth or ideas. He used his technical background to cultivate ideas and move forward. He had a ton of experience and was able to use it to his benefit.”

11. Why did Peyto recently convert to an income trust?

“It’s the most tax-efficient vehicle for us to be in, and the other thing we’re cognizant of is that there’s a correct pace of growth. The success we have in the field, the appreciation in the price of natural gas and those types of things can increase the amount of cash that we have available to invest, and increase it at a faster rate than we might necessarily be prepared to invest it at.

"Typically, in oil and gas, guys take whatever they have to invest and invest it. What we want to do is invest $200 million at the most per year. We don’t want to invest more than that because it would affect our quality of investments. We don’t want to increase our investments at a pace tied to the price of gas or our success.”

12. How does your growth strategy change as you move forward as an income trust?

“It doesn’t change one iota. We still look at a dollar and look at opportunities and say: ‘Can we make more than a dollar on that?’ If something changes so that acquisitions become the way to go, then we’ll look at that, too. But the ones (acquisitions) I’m looking at and the ones I’ve looked at in the past sure don’t compete against the type of return I can get with a drilling opportunity. The fact that we call ourselves a trust doesn’t change the fact that it’s an oil and gas business, and the shareholder has to measure his total return based on the distribution he’s getting back and based on the appreciation of the stock price which will be tied to the performance that we can generate.”

13. How do you respond to critics who say there may be too much risk for an income trust in pumping 50 per cent of profits back into exploration?

“Well, I don’t know who those people are. We’ve been doing that (funnelling profits into exploration) from Day 1. I would say that part of the problem with the industry in the past 20 years is that companies have been managed by people who didn’t build the companies. You had managers who were actually losing money for their shareholders and then you had a new game created called the royalty trust, where people realized that if they gave the money back and went to a “blow-down” mode, that’s worth more than the management of Rio Alto (a former company that ran into financial difficulty) losing all the money for us. These people running the trusts were never explorers or finders. So, I would say that the market should be very cautious about guys who have been running trusts who, all of a sudden, say that they want to drill wells. The market cap of our company is based on results, not hype, so I think our ability to actually build a company with the highest-quality assets shouldn’t be questioned by people. Our assets are perfectly fit for a distribution model.”

14. How do you think you stack up against other oil and gas trusts?

“I happen to know that we have the lowest operating costs relative to all the royalty trusts. We also have the longest reserve life relative to all the royalty trusts. We have the lowest tax on our shareholders’ money of all the royalty trusts. And I know by looking at these trusts right now that they are a pretty dismal business, and when Peyto starts being compared to them, they’re going to start to look pretty pitiful.”

15. What sets your company apart from other oil and gas trusts?

“Other trust companies’ production per share – which no one wants to focus on although that’s what you should focus on as a unitholder – is dropping at a pretty alarming rate, given the fact that these assets aren’t supposed to be declining all that much and these folks are still withholding 15 to 20 per cent of the cash flow while the debt is going up . . . I mean, it’s just an opportunity to trade at a premium to what you’re really worth and issue equity to go buy more things.”

16. What has the feedback been like to your promotion of industry comparisons with other companies?

“We’ve gotten excellent feedback from our shareholders. The shareholders do have a right to know what they own. No one has directly challenged me on those (online) slides (of industry comparison). They don’t have the gumption to phone me up and say they have a problem with that, because those are the facts. We have never felt comfortable guaranteeing growth or guaranteeing results to people. That’s just not our game. Yet, analysts and other people have no problem comparing what we’ll look like a year from now compared to other companies. Let’s face it. That comparison is extremely inaccurate because it’s not real yet. And they’ve been wrong time and time again in what we’ll look like. We tend to do a lot better than they predict.”

17. Do you lose sleep over what your rivals think of you?

“I could care less. I know what my rivals really think of me. I know they think it’s incredible what we’ve done. They look at what we’ve done, they look for every hole in it and they can’t find one. I don’t lose any sleep at all.”

18. How long do you wish to remain CEO of Peyto?

“As long as I’m able to continue to have a balanced lifestyle. I work, I have my fitness, I have my family (wife and five children) and I’m able to enjoy all three of those things. When that becomes imbalanced, then I’m going to have a problem with being the CEO . . . I’ve never been a CEO who felt like I had to do the cocktail circuit or the lunch circuit. I usually run on my lunch hours and I’ve never been here on a weekend. I believe I work efficiently. I’m usually out of the office at 4:30. Most CEOs work a lot more hours than that. I’ll give ’em credit for that. I’m not sure what they’re doing. I’ve probably worked less than most CEOs and I’d say our company has performed a hell of a lot better, too.”

19. Has success changed you and your lifestyle?

“It has given me the freedom to do the things I enjoy doing, but it hasn’t changed my values or the things I believe in.”

20. It is 2010. Are you the CEO of Peyto, running a new oil and gas play or quaffing a Mai Tai in Hawaii?

“I would hope that by then I have an involvement in Peyto, but that I’ve mentored someone to become the CEO. I think you always need change, you need new blood and you want new ideas. Being a pretty dynamic person, I could stay on top that long and change with time, but I wouldn’t want to be curtailing our ability to grow by keeping me at the top. We’ll let time tell what happens. I’d never start another public company because I don’t need the public arena anymore to make my money.”

IN PROFILE: Don Gray
* Born/raised/age: Oxbow, Sask.; Oxbow; Houston, Tex.; Sydney, Australia; Caracas, Venezuela; Calgary; 37.
* Title: President/CEO, Peyto Exploration & Development.
* Education: Bachelor of Science (petroleum engineering), Texas A&M University.
* Career: Gray founded Peyto and became CEO in 1998 after losing his job at Pinnacle Resources when it was taken over by Renaissance Energy. He has spent his entire career in the oilpatch, working in various capacities with Pinnacle, Voyageur Exploration, Poco Petroleum and Anderson Exploration.
* Passions: Mountain biking, running.

THE COMPANY: Peyto Exploration and Economic Development
* Brass: Don Gray, president/CEO; Rick Braund, chairman; Roberto Bosdachin, VP, exploration; Darren Gee, VP, engineering; Lyle Skaien, VP, operations; Sandra Brick, VP, finance.
* Profile: Peyto is an oil and gas company focused on developing and producing natural gas in Alberta’s
central deep basin. Its core property is at Sundance, west of Edmonton. The company is in the process of
reorganizing as an income trust and intends to distribute to unitholders in the second half of 2002 approximately 50 per cent of its cash flow, or 15 cents per trust unit per month.
* Recent Stock Price (PEY-TSX): $15.73 (52-week range, $5.32-$16.15).
* Website: www.peyto.com
* Contact Info: #2900, 450 1st St. S.W., Calgary, T2P 5H1; Phone/Fax 403-261-6081 / 403-261-8976.